grow smart session ii: corporate governance jeffery k. mitchell blacksburg, virginia office

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GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

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Page 1: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

GROW SMARTSESSION II: CORPORATE GOVERNANCE

Jeffery K. MitchellBlacksburg, Virginia Office

Page 2: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

The Grow Smart Series

5-part series Practical Strategies

• Raising Capital• Corporate Governance• Employee Strategies• Employee Incentives• Protecting IP

Sponsoring Organizations

Page 3: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Why is corporate governance important?

“[O]ur most recent experiences with corporate malfeasance suggest that governance has strayed from the way we think it is supposed to work. By law, shareholders own corporations, and corporate managers ideally should be working on behalf

of shareholders to allocate business resources to their optimum use.”

Former Chairman of The Federal Reserve BoardAlan GreenspanMay 8, 2003

Page 4: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Corporate Governance Defined

Internal systems that establish the relationships between the corporation and its stakeholders• Shareholders• Management• Board of Directors• Employees• Creditors• Vendors• Government/Regulators

Policies, statutes, rules, practices Values and ethics

Page 5: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Bad Corporate Governance

Page 6: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Corporate Governance - Sample

Corporate governance at Microsoft serves several purposes:• To establish . . management accountability . . . • To provide structure…to monitor performance…• To strengthen ..our culture of business integrity…• To encourage the efficient use of resources, and• To require accountability for the stewardship of those

resources.– www.microsoft.com

Page 7: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Why Should Private Companies Care?

Piercing the corporate veil• Personal liability

Clarity and accountability• Better results• Avoid problems• Stronger market reputation

Page 8: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Piercing The Corporate Veil

Two theories that enable third parties holdings owners responsible for corporate obligations• Alter Ego Theory

– Distinction between corporation and shareholders

• Instrumentality Theory– Use of corporation for personal gain

Fact basis determination

Page 9: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Piercing the Corporate Veil - Examples

Depositing corporate funds in personal account

Executing contracts in personal name No corporate formalities – stock purchase,

annual meetings, bylaws, minute book Fraud

Page 10: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Corporate Governance Matters for Private Companies Too . . .

Public company federal laws do not apply to private companies• Sarbanes-Oxley• Areas of concern the same

Reduce risk of fraud, embezzlement Greater market reputation

• Investors• Banks

Process predictability

Page 11: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

For A Stronger Company . . .

Shareholders delegate authority to the Board of Directors which delegates to the management

Separation of ownership and control Clear expectations Responsibility and Accountability Exit Strategy Private Equity Market D&O Insurance

Page 12: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Corporate Governance Controls

Internal Control Factors• Board of Directors• Separation of duties• Separate individuals• Checks and balances

External Influencers• Statutes • Audits (Financial, Operations)• Competition/Market• Agreements

– Shareholders Agreement– Financing Agreements– Customer/Strategic Partner Agreements

Page 13: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Role of Board of Directors

Effective governance over the corporation’s affairs Balance diverse constituencies Oversee management Long-term strategy development President/CEO evaluation Appropriate committees (audit, compensation)

Page 14: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Sample Director Qualifications

Exhibited behavior that indicates a …highest ethical standards . . .

Business, governmental, non-profit or professional experience… policy making…operational level…

Special skills, expertise and background . . .complement the existing directors . ..

Financial expertise … Will effectively…take into account…legitimate interests and

concerns of all of the …stakeholders Will challenge management… Able to devote sufficient time and energy.

– Citigroup Inc Corporate Governance Guidelines (as of May 27, 2008)

Page 15: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

The VA Business Judgment Rule

General standards of conduct for director. A. A director shall discharge his duties as a director, including his duties as a member of a

committee, in accordance with his good faith business judgment of the best interests of the corporation.

B. Unless he has knowledge or information concerning the matter in question that makes reliance unwarranted, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by:

1. One or more officers or employees of the corporation whom the director believes, in good faith, to be reliable and competent in the matters presented;

2. Legal counsel, public accountants, or other persons as to matters the director believes, in good faith, are within the person's professional or expert competence; or

3. A committee of the board of directors of which he is not a member if the director believes, in good faith, that the committee merits confidence.

C. A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section.

D. A person alleging a violation of this section has the burden of proving the violation. -- §13.1-690 Virginia Code

Page 16: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Conflicts of Interest

A conflict of interests transaction is a transaction with the corporation in which a director of the corporation has an interest that precludes the director from being a disinterested director.

A conflict of interests transaction is not voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true:

1. The material facts …. were disclosed or known to the board of directors . . . and the board of directors . . Approved . . the transaction;

2. The material facts of the transaction and the director's interest were disclosed to the shareholders . . . and they authorized . . . ; or

3. The transaction was fair to the corporation. -- §13.1-691 Virginia Code

Page 17: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Governance Document Review

Articles of Incorporation• Complete and Comprehensive• Accurate to current situation

Bylaws• Shareholder Meetings• Policies and procedures for Board of Directors• Established processes

– Election– Reporting– Information

• Annual meeting format Shareholders’ Agreement Information Rights Agreement

Page 18: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Corporate Minutes

Permanent, official record of actions of shareholders, directors or committees

Prima Facie evidence of the facts they set forth Statutory requirement Avoid future misunderstandings

• WHEREAS (why are we acting, what is the “background”)• RESOLVED (the action taken)

– Approve– Adopt– Ratify

Page 19: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Executing Agreements

Signature blockMY COMPANY, INC.

By:________________Name, Title

Corporate resolutions • Major transactions• Evidence of corporate action

Page 20: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Action Steps For A Private Company

Create/Review Board of Directors • Board of Advisors

Have written policies/agreements• Bylaws• Shareholder Agreements• Information Rights Agreements

Consider an audit• Establish sound financial procedures

Establish and re-enforce a culture of honesty• Adopt a corporate statement on ethics

Create accountability

Page 21: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Corporate Governance … A Check-Up

Organizational standing Organizational document review Internal audit review Management responsibilities review Board of Directors understanding/training Cash management/operations Management Ethics policy

Page 22: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Conclusion . . .

Watch for future events• March 24: Smart Employee Strategies• April 7: Employee Incentive Plans• April 21: Ten Strategies for Protecting Your IP

Email contact for LeClairRyan:• Jeff Mitchell [email protected]

Email contact for SWVTC:• Shannon Blevins [email protected] • Esther Bolling [email protected]

Questions & Answers

Page 23: GROW SMART SESSION II: CORPORATE GOVERNANCE Jeffery K. Mitchell Blacksburg, Virginia Office

Thank You!